Can you really build wealth with real estate?

The short answer is yes. The long answer though involves a few caveats and the ability to pick a good investment… also luck. Luck is helpful.

I was reading and article in the Telegraph about making a fortune in real estate. It made me think of my auntie-in-law (my family more than tripled in size when I got married, I have in-laws coming out of everywhere), and the questions she was asking me last week about our investments. I wont mention anything too specific but long story short she said she was very nervous about investment of any kind, she’d read all the horror stories, but at the same time with retirement age creeping up and the generally not stellar state of super theses days, she felt like she really might need something else. A few months ago I was told I should write a book on the subject, but the honest truth is that I don’t think the explanation of what I’ve done is long enough to fill one!

It happened like this; I met the man of my dreams in a bar. He was a little tidily and I was wearing a low-cut dress. Holy cow and four months later and we were in the family way! Bugger, thought we, what are we going to do? We were both working part-time in supermarkets (competing ones! Aren’t we daring?), and renting with family members! A little bit of chitty chat and it was decided we’d go for it, whole hog, we’d buy a house and see about making this work. Now, we had a massive advantage that many people DON’T have – his name’s Daddy. My father had recently sold his own home and was living with me, we were pretty darn happy with this arrangement (and built-in baby-sitters are GREAT), he got along well with my gentleman so it was agreed we’d stay together. This meant that we had some capital to work with. Not a ridiculously impressive amount, but about $50 000 (trust me it’s NOT that much in the housing market, you don’t NEED it, but it accelerates the process).

Armed with this dosh, we went looking for likely candidates… only to discover we weren’t going to be staying close to town. That was OK, we’d go a little further afield, everything would be fine. In the first week, we saw a 5/6 bedroom place which was really two flats joined by a hallway (two kitchens and bathrooms etc)… it was $250k. That was Riiiiiiiiight on the edge of our ability to buy. We kicked it back and forth and decided we were being silly. Let it go lovelies, move on. So we kept looking. Sometime later, still houseless, we saw that place again! $230k this time… we had the exact same discussion again, about renting out half of it and blah blah blah… and again we decided we were being dumb. Who needs that kind of aggravation with a new baby on the way?

Next time we saw it, it was going up for auction! We thought we’d go have a look, we still couldn’t afford it but we’d never been to an auction before and it’d be fun. We missed it. Totally forgot. Didn’t matter, a week later she was back up AGAIN! $195k this time! Now things were starting to look a bit more realistic, so we got in the car and went to have a look.

The place was a wreck. The layout was mental, one flat had uneven concrete flooring in the kitchen and bathroom, the other had a set of stairs that were a concussion danger to everyone but me (I’m a midget, but my husband is 6’2…), the backyard was not only full of stones, but broken glass and stinging nettles as well! Still… we had that money from my dad, the bank was happy to lend us most of the amount… we could fix her up… God help me we bought it! In the end we paid $185k, with a $15k deposit from dad. Then we set about fixing her up. We lived in that ramshackle poop-box for two years!

We kangahammered up the concrete in the back yard, and knocked down the verandah which wasn’t actually secured to the house in any way! We demolished some interior walls, and evened out the floor. At 11pm one night, when our baby had just gone to sleep, my husband looked at a pop out section of wall speculatively and said to me “you know… I bet there’s a fireplace behind that…” My father came to investigate some 20 minutes later and found us with a hammer and crowbar removing the plaster! He was right though, the original hearth from the house, built in 1901, was still there in all it’s glory! To this day it’s my favourite feature.

Eventually we moved the evil stairs and made them legal, we repainted and recarpeted, we bled for that house let me tell you!

Now, almost 4 years later, having spent a grand total of about $55k on the place, it is rented out with an income that covers the mortgage, landlord insurance, rates, and puts aside something on the order of $8k a year which we then put back into the house (we’ve repainted the outside, fixed up a bathroom, that kind of thing). It’s also now worth at least the $250 that the original sellers wanted. So, $55 grand is slowly working its way towards becoming $250, with no more financial input from us. We got lucky. Wildly and unbelievably lucky!

Firstly, we underestimated how much EVERYTHING would cost, and how difficult it would be. Every single thing we did turned out to be more complicated than it looked, and consequently more expensive. But we learned. We perfected the formula. We’re now buying our second house to work our magic on, but this time we’ve been a bit smarter. So, here are my tips if you want to do something like this;

If you’re going to renovate something, live in it. This isn’t just a financial thing, it’s an experience thing. Experience the house. Some of the things we thought that place would NEED, turned out weren’t that important and we dumped them. Other things we thought weren’t a problem seriously affected the livability of the home. You need to know the place, otherwise you may well botch the business.

When looking for something to renovate, especially the first time, focus on places with cosmetic issues rather than structural ones. Redoing those stairs almost cost me my sanity! Look for ugly paint work, nasty carpet, wall paper and overgrown gardens. Much less stress. You can move on to demolitions later, please trust me on this.

You want something that’ll rent, and not only something that’ll rent but something that will cover itself. Nasty little secret? Negative gearing blows chunks unless you already have money. Yes, at the end of the financial year you get a nice tax break, but you’re out-of-pocket every week. If you don’t have pockets deep enough, that’ll really sting! Positive gear. Any problematic profit you accrue during the financial year can be spent on the property. What we aim for is a nice 0 sum game, so that our investment property doesn’t stuff us around come tax time, and we know we’re constantly improving the value.

Valuations are useful to tell you the optimum price of something, not its real worth. Ideally, like the property we outlined above, you want something that reports a ‘sight unseen’ value somewhat higher than its real face value. Sight unseen valuations (banks do them all the time) are based on information; number of bedrooms/bathrooms, square footage, location etc – but they don’t take into account the fact that the whole place is painted the colour of baby crap, or that the yard is full of poison berry bushes. That valuation tells you what the place could be worth, if you do your job right.

Quick profit is the trap that snaps the neck of most investors. Sure, plenty of people have made good, and fast, profit on real estate, it’s totally doable, but it is more of a gamble and it takes more money and effort. Remember that for things like the first home owners grant to apply, you have to live in the house for a certain period of time (check with your state). If you don’t, they’re gonna want that money back. You can fast forward the above plan with enough money, and a willingness to hire trades people, but the upfront cost can be pretty prohibitive (if you had that kind of dosh, you probably wouldn’t be online reading an article like this). Personally, we allocate a minimum of 2 years when we start a property renovation, with a view to not SELLING it until it’s fully paid off by the tenants rental payments. That takes a while, and it’s a bit commitment.

The final thing you should know about fiddling around in real estate, and this is a serious warning… it can be very addictive. I look at the housing market at least three times a week. I trawl through websites like realestate.com.au looking for things in my size/price range.